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Earnings Functions and Rates of Return

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Listed:
  • James J. Heckman
  • Lance J. Lochner
  • Petra E. Todd

Abstract

The internal rate of return to schooling is a fundamental economic parameter that is often used to assess whether expenditure on education should be increased or decreased. This article considers alternative approaches to estimating marginal internal rates of return for different schooling levels. We implement a general nonparametric approach to estimate marginal internal rates of return that take into account tuition costs, income taxes, and nonlinearities in the earnings-schooling-experience relationship. The returns obtained by the more general method differ substantially from Mincer returns in levels and in their evolution over time. They indicate relatively larger returns to graduating from high school than to graduating from college, although both have been increasing over time.

Suggested Citation

  • James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," Journal of Human Capital, University of Chicago Press, vol. 2(1), pages 1-31.
  • Handle: RePEc:ucp:jhucap:v:2:i:1:y:2008:p:1-31
    DOI: 10.1086/587037
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    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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